EU Set to Probe Ireland's Tax Arrangements with Apple

By Bryan Chaffin

Jun 10th, 2014 7:10 PM EDT

The European Union's (EU) European Commission is set to launch a probe into Ireland's tax arrangements with large multinationals such as Apple. Reuters reported the news, but buried near the end of the story is that the Commission's focus is likely to be the tax regime that allows Apple and others to protect overseas revenues from local taxation, rather than Apple itself.

Ireland's taxation laws allow multinationals to set up subsidiaries that effectively turn them into stateless entities whose revenues are subject to no jurisdiction. It's the definition of entirely legal tax avoidance, and Apple has been among the most successful companies in routing much of its international revenues and earnings through its Irish subsidiaries.

The result of this is that Apple's tax burden outside the U.S. is extremely low, as little as 3.7 percent. Apple is the largest tax payer in the U.S., according to testimony from CEO Tim Cook in front of a Senate hearing in 2012, paying billions in U.S. taxes. Outside the U.S., however, Apple pays comparatively little.

This has frustrated many countries around the world, but the reality is that everything Apple does is, as noted above, entirely legal, and that's thanks to Ireland, a member of the EU. Tim Cook told the U.S. Senate that it follows the law, and that the Senators should change the laws under which his and every other company operate if the want taxes to be handled differently.

This applies outside the U.S., too. Of course, Ireland has little reason to change its laws. Its laws result in local employment both in these subsidiaries and in the banks and other infrastructure companies that support them, and many of these jobs pay quite well.

So, it remains to be seen what the EU can do. The European Commission can probe or investigate a member country's laws all it wants, but there's little it can do to force change aside from pressuring that country.

Then there's the problem of other countries stepping in to fill any void. If Ireland were to change its tax laws, there are many others who would be happy to offer similar arrangements to attract the companies currently operating in Ireland.